Directors liability in the spotlight

Mainzeal Property and Construction Limited (in liq) v Yan & Ors [2019] NZHC 255

When Mainzeal Property and Construction Limited (Mainzeal) collapsed in February 2013, it left behind a raft of unsecured creditors who were jointly owed just over $110 million. The proceedings brought by Mainzeal's liquidators against its former directors were for the effective benefit of these creditors.

The liquidators' principal claim was that the directors had engaged in reckless trading, and in doing so had breached their duties under s 135 of the Companies Act 1993 (Act). In finding that the liquidators' claim was made out and total compensation of $36 million was payable by the directors, the High Court has sent a strong signal against the dangers of companies continuing to trade whilst insolvent.

Background

Although complex in the detail, the key background facts can be succinctly stated:

In 1995, a Chinese focussed investment group (Richina Pacific) acquired a majority shareholding in Mainzeal's holding company. Richina Pacific established a new independent board for Mainzeal in 2004, which comprised Mr Richard Yan, who was associated with Richina Pacific, and three independent directors, including a notable former Prime Minister. Over the ensuing ten years, Richina Pacific extracted considerable funds from Mainzeal for investment in China. Mainzeal was technically insolvent for much of this time, but continued trading in reliance on promises from Richina Pacific that financial support would be provided when needed. These promises were never formalised, however, nor were they legally binding. Even if the promises made were legally binding, they were potentially meaningless, as the effect of Chinese capital rules meant that Richina Pacific could have been prevented from providing support. Mainzeal was also able to continue to trade by using funds received in advance from construction contract principals to pay sub-contractors. This did, however, mean that Mainzeal's financial performance was vulnerable to significant losses and company failure. Following a difficult period in 2012, Richina Pacific was no longer willing and/or able to fully support Mainzeal, and it collapsed. The liquidators of Mainzeal subsequently commenced proceedings against its directors alleging various breaches of the Act. Liability of Mainzeal's directors

Against this backdrop, the Court came to consider the claim against the directors under s 135 of the Act. Although several...